"They didn't just put lipstick on the pig, they added pearls."
By GREG HITT and DEBORAH SOLOMON
The Wall Street Journal
WASHINGTON -- President George W. Bush signed into law an unprecedented $700 billion plan to rescue the U.S. financial system, one of the largest-ever government interventions in the nation's economy -- and almost certainly not the last.
The Treasury Department is expected to move quickly to start buying distressed assets from struggling financial institutions, although any impact might not be felt for some weeks. Many details -- such as who will administer the program and how -- are still to be worked out.
That lingering uncertainty cast a pall over stock and bond markets. Credit markets remained stressed as lenders continued to worry about getting repaid. The three-month Libor rate, a measure of the rate that banks charge to lend to one another, rose to 4.33% Friday from 4.21% the day before.
Stocks, which had been up more than 300 points before the voting began, ended down 157 points at 10325.38. The decline capped the worst week for the Dow Jones Industrial Average in more than six years, and left the market trading where it was nearly three years ago.
[House Speaker Pelosi called the landmark bill 'only the beginning' of government rescue efforts.] Associated
Passage of the bill came amid new evidence from the labor market that the U.S. is tilting further toward recession. Companies shed 159,000 workers in September, the fastest pace in more than five years, the Labor Department reported.
The legislation ranks alongside other broad federal attempts to prop up the economy, such as Roosevelt's New Deal and the resolution of the Savings and Loan debacle of the late 1980s and early 1990s.
It will likely be followed by other moves. The Federal Reserve could cut interest rates and take further steps to ensure there are enough funds coursing through the financial system. Congress has already beefed up jobless benefits and is expected next year to push for new stimulus efforts, such as spending on infrastructure.
Looking to next year, Democratic lawmakers are planning to revamp financial-system regulations, with hedge funds, private-equity funds and investment banks all likely to come in for tighter scrutiny. House Speaker Nancy Pelosi (D, Calif.) portrayed the legislation as "only the beginning" of the legislative response to the faltering economy.
The process picked up speed on Monday after the House rejected an earlier version, sending markets into a tailspin and highlighting deep public opposition to the president's plan.
President Bush and the leadership of Congress closed ranks and sweetened the bill with tax cuts. The compromise won wide support in the Senate Wednesday and passed the House on the second attempt on Friday by a vote of 263-171. President Bush signed the bill shortly thereafter.
The bill establishes the Troubled Asset Relief Program. The Treasury will have $700 billion to buy up toxic mortgages, securities and related assets that have undermined the nation's financial architecture.
The bill mandates the government take equity stakes in companies participating in the rescue and would limit compensation for executives, barring "golden parachutes." It also says the administration must develop a plan to ease the wave of foreclosures through modifying loans acquired by the government.
For all of the changes made to the original Treasury plan, lawmakers succeeded little in imposing control over use of the funds. The bill requires Treasury to set up an insurance-based alternative. But the core of what Mr. Paulson requested survived largely unscathed.
Treasury faces a host of complex questions it must answer before it can roll out the program broadly. Among the biggest issues: which assets to buy, how to buy the assets and whom to buy the assets from.
Treasury doesn't want to buy every mortgage-backed security on the books of every financial institution, according to a person familiar with the matter. Plus, not all mortgage-backed securities are alike and Treasury wants to be careful that it doesn't overpay for the truly worthless assets.
After hiring asset managers to run the program, it's likely to start with securities "where there's enough out there and the market is thick enough so the auction can be done well," said a person familiar with Treasury's thinking. One example would be all private, subprime loans made during a certain financial quarter.
The purchases would likely be made through what's called a reverse auction, in which institutions compete to sell assets. The government would suggest a high price to ensure significant participation, which should then allow Treasury to pick from the lower prices offered until it gets the quantity of securities it wants.
The department plans to hire about two dozen full-time employees to work on the program, including lawyers, accountants and those with financial-market expertise. It's expected to be several weeks before Treasury begins its first auction, according to people familiar with the matter. The department could move more swiftly to buy assets from specific institutions if there's a need.
The bailout bill also allows the Fed to begin paying interest on the reserves that banks leave on deposit with the central bank, something it didn't do before. Paying interest on reserves makes it easier for the Fed to flood the financial system with additional cash.
This comes on top of other steps the Fed has taken in recent weeks to provide financial institutions with the cash they need to keep operating.
But so far, it hasn't been successful in unfreezing credit markets. Short-term money markets -- where companies raise money to finance their operations -- remain distressed. Financial firms went to the Fed for $409.5 billion in emergency overnight loans by midweek, a record.
That congressional leaders turned around the vote in less than a week underscores the widening unease among lawmakers about the state of the economy. The political impact could be immediate, especially for vulnerable candidates in conservative districts who ended up supporting the bill. On Friday, 26 Republicans and 33 Democrats switched from no to yes.
Illinois Rep. Rahm Emanuel, the fourth-ranking House Democrat, suggested rank-and-file lawmakers didn't feel a sense of urgency until after Monday's 777-point stock-market decline. "Monday was the political system looking over the abyss," he said.
Throughout Friday morning, a steady stream of lawmakers strode to the floor to announce they were changing their minds. The turn of sentiment came after members went back to their districts and heard voters sharing stories about their shrunken retirement nest eggs and how the credit crisis is squeezing Main Street.
Some cited the Senate's proposal to temporarily raise federal deposit insurance limits to $250,000 from $100,000. Some pointed to a provision that would press for the overturn of so-called mark-to-market accounting rules, which critics say contributed to the downward spiral of markets. For others, it was a package of tax breaks.
Though "it may be politically damaging," Rep. Howard Coble (R., NC) said he would support the bill after voting against it Monday. He pointed to the raised deposit-insurance limits and the tax changes.
Rep. Zach Wamp (R., Tenn.) said the accounting rule changes will help business. He opposed the bill Monday but now supports it, arguing broad action is needed to stem the decline in credit markets.
"Monday, I cast a blue-collar vote," he said. "Today, I'm going to cast a red, white and blue vote for my country."
At least 11 of the 26 new GOP votes in favor of the bill came from the conservative Republican Study Committee, which had voted 4-to-1 against Monday's legislation.
One vulnerable Republican, Rep. Lee Terry of Nebraska, said improvements to the bill had convinced him to vote in favor, but he lamented that "those greedy pigs on Wall Street don't deserve help from hard-working Americans."
A large part of the new Democratic support came from members of the Congressional Black Caucus, where 13 of 21 representatives who opposed the original bill switched.
Democratic Rep. Barbara Lee said she was glad her opposition had slowed the package long enough for some improvements. The budget crisis in her home state of California demonstrated the need for urgent action.
Despite complaints from fiscally conservative Democrats about the addition of $150 billion in tax breaks, support from the moderate Blue Dog caucus held strong. Of its 47 members, all 25 who voted yes on Monday maintained their approval, and six members provided support for the first time.
Phone calls and emails flooded Capitol Hill. The Club for Growth, a conservative group, opposed the bailout. So did Democrats.com, a liberal group, which denounced the Senate's decision to add tax cuts. "They didn't just put lipstick on the pig, they added pearls," the group said.
The effort was countered by the business community, which jumped into the fray alongside the Bush White House and the Republican and Democratic presidential nominees, John McCain and Barack Obama, in support of the plan.
Congressional leaders are planning bills next year that would toughen oversight of the financial-services sector.
"We will be back next year to do some serious surgery," said House Financial Services Chairman Barney Frank (D., Mass.). Mr. Frank wants legislation to rewrite housing finance -- including the roles of mortgage giants Fannie Mae and Freddie Mac -- and overhaul regulation of financial services.
—Jon Hilsenrath, Brad Haynes and Romy Varghese contributed to this article.
© 2008 Dow Jones & Company, Inc.:www.online.wsj.com
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